Patent Application
20130031020
The present invention relates to asset backed security systems and methods. More particularly, the invention relates to mechanisms used to retain interests in asset backed securities.
Asset backed securities are securities that have values and/or income payment derived from and backed by a pool of underlying assets. Exemplary underlying assets include residential mortgages, commercial mortgages, credit card payments, automobile receivables, royalty payments and movie revenue. Pooling underlying assets into asset backed financial instruments is a process called securitization and allows the financial instruments to be sold to general inventors. Pooling of underlying assets also diversifies risks because each individual asset represents a fraction of the total value of the diverse pool of underlying assets.
Regulators of asset backed securities have expressed a desire to greater regulate the origination and securitization of asset back securities. Recent legislation in the United States, for example, includes risk retention requirements. The legislation mandates that originators and securitizers of asset backed securities retain a 5% interest in such securities. Originators and securitizers of asset backed securities may hold securities in multiple diverse accounts. Auditing multiple diverse accounts to make sure risk retention requirements are satisfied can be difficult and costly.
Therefore, there is a need in the art for systems and methods that can be used to implement risk retention requirements for asset backed securities.
Embodiments of the present invention overcomes the problems and limitations of the prior art by providing methods and systems for implementing risk retention requirements for asset backed securities.
In one embodiment of the invention, a method of administering a margin as credit enhancement contracts is provided. A risk retention entity is assigned a long position for a margin as credit enhancement contract corresponding to a predetermined percentage of an asset backed security. A buyer of the asset backed security is assigned a short position for the margin as credit enhancement contract. When the asset backed security expires, a computer device settles the long and short positions of the margin as credit enhancement contract.
In other embodiments, the present invention can be partially or wholly implemented on a computer-readable medium, for example, by storing computer-executable instructions or modules, or by utilizing computer-readable data structures.
Of course, the methods and systems of the above-referenced embodiments may also include other additional elements, steps, computer-executable instructions, or computer-readable data structures. The details of these and other embodiments of the present invention are set forth in the accompanying drawings and the description below. Other features and advantages of the invention will be apparent from the description and drawings, and from the claims.
The present invention may take physical form in certain parts and steps, embodiments of which will be described in detail in the following description and illustrated in the accompanying drawings that form a part hereof, wherein:
Aspects of the present invention may be implemented with computer devices and computer networks that allow users to exchange trading information. In particular, a trading network environment may be used to exchange and match bids and offers for the disclosed financial instruments. An exemplary trading network environment for implementing trading systems and methods is shown in
The trading network environment shown in
Computer device 114 is shown directly connected to exchange computer system 100. Exchange computer system 100 and computer device 114 may be connected via a T1 line, a common local area network (LAN) or other mechanism for connecting computer devices. Computer device 114 is shown connected to a radio 132. The user of radio 132 may be a trader or exchange employee. The radio user may transmit orders or other information to a user of computer device 114. The user of computer device 114 may then transmit the trade or other information to exchange computer system 100.
Computer devices 116 and 118 are coupled to a LAN 124. LAN 124 may have one or more of the well-known LAN topologies and may use a variety of different protocols, such as Ethernet. Computers 116 and 118 may communicate with each other and other computers and devices connected to LAN 124. Computers and other devices may be connected to LAN 124 via twisted pair wires, coaxial cable, fiber optics or other media. Alternatively, a wireless personal digital assistant device (PDA) 122 may communicate with LAN 124 or the Internet 126 via radio waves. PDA 122 may also communicate with exchange computer system 100 via a conventional wireless hub 128. As used herein, a PDA includes mobile telephones and other wireless devices that communicate with a network via radio waves.
One or more market makers 130 may maintain a market by providing constant bid and offer prices for a derivative or security to exchange computer system 100. Exchange computer system 100 may also exchange information with other trade engines, such as trade engine 138. One skilled in the art will appreciate that numerous additional computers and systems may be coupled to exchange computer system 100. Such computers and systems may include clearing, regulatory and fee systems.
The operations of computer devices and systems shown in
Of course, numerous additional servers, computers, handheld devices, personal digital assistants, telephones and other devices may also be connected to exchange computer system 100. Moreover, one skilled in the art will appreciate that the topology shown in
At the time of selling asset backed security 204 or shortly thereafter, risk retention entity 202 and buyer 206 establish margin as credit enhancement contract positions corresponding to the asset backed security. For example, risk retention entity may securitize a mortgaged backed security with a face value of $500 million and buyer 206 may purchase the mortgage backed security. A margin as credit enhancement contract corresponding to the mortgage backed security may be created with a nominal dollar value of $1,000. At the time of the sale of the mortgage backed security, a clearing firm 210 or other clearing or tracking entity may assign a long position of 500,000 margin as credit enhancement contracts to the account of risk retention entity 202 and a short position of 500,000 margin as credit enhancement contracts 214 to the account of buyer 206. The name of the margin as credit enhancement contract may correspond to the name of the mortgaged backed security. For example, a mortgage backed security may be named XYZ Mortgaged Backed Security and the corresponding margin as credit enhancement contract may be named XYZ MBS Margin as Credit Enhancement Contract.
Risk retention entities may be required to hold margin as credit enhancement contracts for the life of the corresponding asset backed security. In some embodiments, short margin as credit enhancement contract positions may be liquid and may be purchased and sold.
Margin as credit enhancement contracts may be settled when corresponding asset backed securities expire. Adjustments to the value of a margin as credit enhancement contract may be made before the expiration of a corresponding asset backed security when amortization events or credit events occur. In step 308 it is determined whether an amortization event has occurred. An amortization event may occur when a portion of a pool of underlying mortgages that form a mortgage backed security are prepaid. For example, a mortgage backed security may have an initial value of $500 million and mortgages having a total value of $200 million may be prepaid. When an amortization event has occurred, in step 310 the quantity of the margin as credit enhancement contracts is adjusted. If $200 million of an initial $500 pool of mortgages are prepaid and the corresponding margin as credit enhancement contracts had an initial quantity of 500,000, then 200,000 of the contracts may be liquidated or retired at their current market value.
Next, in step 312 it is determined whether a credit event has occurred. A credit event may be defined by an exchange or other entity. When a credit event has occurred, in step 314, the margin as credit enhancement contracts may be revalued. If, for example, a credit event results in a reduction of the value of an asset backed security by 10%, the value of the corresponding margin as credit enhancement contracts may be reduced by the same 10%. In some embodiments the value of margin as credit enhancement contracts is reduced by the same percentage as the reduction in value of the corresponding asset backed securities. A loss by the risk retention entity and profit by the buyer may be administered by a clearing firm or other entity. For example, if the change in value of the margin as credit enhancement contracts results in a loss of $100,000 to the risk retention entity and a profit of $100,000 to the buyer, a clearing house may adjust the accounts of the risk retention entity and buyer accordingly. The clearing house or other entity may make a mark-to-market payment from the account of the risk retention entity to the account of the buyer.
In step 316 it is determined whether an asset backed security has expired. When the asset back security has expired, a clearing house or other entity may settle the long and short positions of the margin as credit enhancement contracts. As mentioned above, settlement may include making a mark-to-market payment from the account of the risk retention entity to the account of the buyer. When the asset backed security has not expired, control may return to step 308.
The present invention has been described herein with reference to specific exemplary embodiments thereof. It will be apparent to those skilled in the art that a person understanding this invention may conceive of changes or other embodiments or variations, which utilize the principles of this invention without departing from the broader spirit and scope of the invention as set forth in the appended claims. All are considered within the sphere, spirit, and scope of the invention.
